401(h) Plan Tax Benefits: What Owners and CPAs Should Know
The tax story for 401(h) is unusually clean: employer-deductible going in, tax-deferred while invested, and generally tax-free coming out for qualified medical expenses.
Contents
Key takeaways
- Employer contributions are generally deductible, subject to qualified-plan rules.
- Investment growth inside the sub-account is tax-deferred.
- Qualified medical benefits paid to retirees are generally not taxable to them.
- Tax outcomes always depend on plan terms and the specific facts.
Going in: deductibility
Employer contributions to the 401(h) sub-account, like contributions to the underlying qualified plan, are generally deductible to the employer subject to applicable qualified-plan deduction limits. The CPA coordinates timing with the broader tax plan.
While invested: tax-deferred growth
Assets allocable to the 401(h) sub-account grow within the qualified trust and are not currently taxable to participants. Internal investment income is sheltered from current tax, consistent with the qualified-plan framework.
Coming out: tax-free for qualified medical expenses
Benefits paid from the 401(h) sub-account for qualified retiree medical expenses are generally not taxable to the retiree, subject to plan terms and applicable law. This combination — deductible in, sheltered while invested, tax-free out — is the headline tax story.
Important caveats
Every word here is general. Actual outcomes depend on the plan document, the participant's facts, and applicable law. Always confirm with your CPA and ERISA counsel before acting on any tax assumption.
Frequently asked questions
Availability, tax treatment, and plan design depend on the facts and circumstances of the employer, plan document, participant group, and applicable law. 401h.com provides general educational information only — not tax, legal, actuarial, investment, or ERISA advice. Consult qualified tax, legal, actuarial, and plan professionals.
401h.com Editorial
401h.com
The 401h.com editorial team publishes plain-English explainers on 401(h) retiree medical benefit plans. Educational only — not tax, legal, actuarial, investment, or ERISA advice.
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